nToken ifCash Residuals

fCash residuals

fCash residuals refer to an nToken’s net fCash position after converting its liquidity token holdings into their constituent Prime Cash and fCash components. If an nToken account is a net borrower (if end users have been net lenders) it will hold a negative fCash asset position or what we call "negative residuals". Conversely, if an nToken account is a net lender (if end users have been net borrowers), the account will hold a positive fCash asset position or have "positive residuals".

nToken redemptions

The existence of residuals can pose risks in the nToken redemption process, as redeeming nTokens involves trading fCash for Prime Cash. If an nToken account has positive fCash residuals (the nToken account is a net lender and the users are net borrowers) an nToken redemption will cause the nToken to borrow from that liquidity pool and push interest rates and the pool's proportion higher. As redemptions occur, the residuals become larger relative to the pool's liquidity and the pool’s proportion sits closer to the boundary.

To mitigate this redemption risk, governance must set the liquidity pool's interest rate curves such that we expect that market forces will move interest rates and, thereby liquidity pools utilization rates to safe levels if large redemptions start to occur.

ifCash residuals

Upon a quarterly roll, an nToken account will keep any existing fCash residuals in its portfolio. If there is no active fCash market for a given maturity, the nToken account's fCash position will become idiosyncratic (ifCash). This is true for all tenors except for the 6 month as 6 month liquidity pools are rolled into the 3 month pools. Thus only fCash with maturities longer than 6 months will become idiosyncratic.

nToken accounts can hold ifCash residuals, and users can redeem their nTokens for Prime Cash by redeeming around ifCash residuals.

To minimize the amount of ifCash residuals nToken accounts hold and maximize the nToken account's liquidity, the protocol incentivizes third parties to purchase ifCash from the nToken account through the residual purchase incentive parameter.

Residual purchase incentive

The residual purchase incentive parameter makes an adjustment to the ifCash oracle rate. This adjustment reduces the purchase price of residual ifCash sitting in the nToken account. The adjustment is denominated in 10 bp increments (i.e. a value of 10 would equate to 100 bps).

Purpose of the residual purchase incentive

The residual purchase incentive purpose is to act as an appropriate incentive for market participants to buy ifCash residuals in order to increase the liquidity of nToken accounts. The residual purchase incentive is set such that it should cover the expected trading costs to hedge the residual ifCash purchase.

Cash withholding buffer

Cash withholding buffers adjust the oracle rates used to calculate the amount of Prime Cash that nToken accounts need to withhold for ifCash purchasers to be able to purchase negative ifCash residuals following a quarterly roll. In other words, the cash withholding buffers force nToken accounts to keep higher Prime Cash balances upon quarterly rolls to allow ifCash residual purchasers to receive Prime Cash in exchange for borrowing ifCash at a reduced rate.

Residual purchase time buffer

The residual purchase time buffer is the amount of time, in hours, that users are unable to purchase nToken ifCash residuals following a quarterly roll.

Purpose of the residual purchase time buffer

The purpose of the residual purchase time buffer is to mitigate the possible manipulation of oracle rates around the quarterly roll.